Bentall Kennedy’s Amy Price focuses her organization on carefully observing the market drivers.
THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN FEBRUARY OF 2017[dropcap]A[/dropcap]my Price is the president and COO of Bentall Kennedy US, one of North America’s largest real estate investment advisors with over 1,000 employees and over 100 years of history. The company has been an active player in the Bay Area commercial real estate theater for years and is active in acquiring and developing assets throughout the region. In 2015, the firm made big news when it was purchased by Toronto-based Sun Life Financial in a transaction worth $560 million.
Based in San Francisco, Amy has overall responsibility for the operating and financial performance of Bentall Kennedy’s U.S.-based businesses and has direct day-to-day responsibility for all asset management, financing and transactions activities in the U.S. Her in 20-year career includes investment strategy and transaction execution as well as management experience in asset management and finance.
Prior to joining Bentall Kennedy U.S. in 2012, Amy was a managing director and head of Real Estate Investing for the Western United States at Morgan Stanley, where she was an Investment Committee member and founder of the firm’s San Francisco office. Amy also spent time in Morgan Stanley’s New York and Hong Kong offices.
THE REGISTRY: Please tell us about your company’s investment strategy, and where does Bentall Kennedy like to place its bets (product, geography, deal size, JV partnership, etc.)?
AMY PRICE: We invest in a diversified portfolio of properties, with a primary focus on locations in talent-rich markets with strong potential for a sustainable, growing income stream.
We look very closely at the underlying demand drivers in determining specific sub-market preferences with a strong focus on urban core office and multi-family properties, typically with an integrated retail component. Likewise, we focus on industrial properties with compelling demand drivers – close proximity to major population centers, state-of-the art physical specifications, and configurations suited to the distribution of e-commerce goods.
We take a disciplined approach to building our portfolio by acquiring and enhancing when pricing is below replacement cost; and, with the help of partners, developing when above replacement cost.
For all our properties, we adhere to industry-leading sustainability principles and practices to improve property operations and optimize tenant satisfaction. We leverage our strong in-house operating expertise to manage and incorporate these sustainability features – features that generate tenant demand and create value that endures across market cycles.
TR: You have worked in the industry in the Bay Area for a while now and have seen several cycles come and go. What strikes you about this cycle at this particular point in time?
AP: While we’re definitely late in the economic cycle, we don’t anticipate the hard landing that occurred in 2001 and 2008. Those markets were over-leased and over-leveraged. This time around, the Bay Area is far better positioned to withstand any correction that may come, with a strong base of young, talented workers and a concentration of innovative, growing companies. One reason for this is the significant delivery of new housing that has been added to the urban cores, in the Bay Area and across the country, allowing for continued strong population flows to these major markets.
TR: Which property classes at this point in time would you acquire, which would you hold, and which would you like to dispose?
AP: There are no particular property types that we would unilaterally exclude. It really depends on how risk is being priced, and we continue to selectively buy strategic assets we expect to perform well through all market cycles – and that are a good fit for our clients. We’ve been selling non-strategic assets and reinvesting that capital over the past few years, so sales going forward will be more limited.
One sub-sector that we find particularly attractive is medical office. It has compelling demand drivers and is less prone to cyclical swings, since medical services are not strongly correlated to the broader economy. These properties also provide the opportunity for higher yields – so it’s definitely an area of focus.
TR: We understand that in 2016 quite a bit of institutional investors, such as pension funds have increased their redemptions. What is your read on that, and has that development affected you in any way, as well?
AP: There were increased redemptions from core, open-end funds in 2016, but this followed a prolonged period of low redemptions and high contributions, resulting in extraordinary growth in the core funds. While we have seen modestly higher redemptions in our own portfolio, we continue to have strong contributions and net positive inflows, so it isn’t directly affecting our investment approach.
I do see a couple of trends though. The first is that global investors are approaching the U.S. more cautiously, in line with their cautious approach to the U.K. and Europe. Where there’s uncertainty, there’s caution, and these are more uncertain times. That said, we have yet to see a shift away from the U.S., as it’s still a preferred place to invest relative to the global alternatives.
Secondly, real estate is still a compelling asset class for institutional investors. Equities remain volatile, and real estate offers attractive spreads over fixed income. As a result, allocations to real estate remain stable. However, we are seeing investors reallocating within their real estate portfolios, some going from core to value add in pursuit of total return, and others moving from value add to core to take some risk off the table.
TR: If 2016 was a successful year for the industry, in general, how do you feel about 2017?
AP: Overall, I think real estate will continue to perform well, although I expect that we’ll continue to see a modest softening in pricing, as we’re well along in the market cycle, and there’s less capital chasing opportunities.
If the government implements a stimulus agenda of tax cuts and infrastructure spending, we’re likely to see this cycle extend but with a more significant correction on the back-end, which would predict greater pricing adjustments in the medium term.
TR: What concerns you about the year ahead, and conversely, where do you see opportunities to evolve?
AP: We see potential shifts in government policy creating both opportunities and challenges. Near term stimulus – through tax cuts and infrastructure spending – could create new tail winds in the short term. On the other hand, restricting international trade and immigration could create stronger headwinds over the longer term. It’s too early to predict outcomes, but we are watching all of these issues very closely.
TR: Where do you see interest rates going in 2017, and what impact should that have on the industry broadly?
AP: So much remains unknown, it is really too early to forecast near term changes in interest rates. However, we do expect interest rates to rise, particularly with late-cycle stimulus, which tends to be inflationary. But we expect the rate increases to be modest, slow and disciplined – and rates will still be relatively low on ahistorical basis. For these reasons, we think the economy will be able to absorb these rate increases quite well, and the impact on real estate will be minimal.
TR: What are you doing differently today given the market environment?
AP: Overall, we’re taking a more defensive position and searching for quality income growth. We’re focusing on opportunities where we can create value through leasing and operations. We’re approaching the riskiest opportunities, such as speculative development, very selectively and in a more protected position through debt and preferred equity structures. As the market cycle shifts, we’re watching for signs of re-pricing. If you’re wearing a buyer’s hat, I think a little patience will be rewarded.